2015 (3) TMI 977 - AT - Income Tax

Computation of the long-term capital gains on sale of the asset - Assessing Officer completing the assessment adopted the cost inflation index of the financial year 1994- 95 being year of conversion of the asset into stock-in-trade instead of year of sale as per assessee - Held that - Market value as on the date of conversion into stock-in-trade of the financial year 1994-95 and applying cost inflation index of the financial year 2006-07 is found to lack lucidity. By applying the cost inflation index of the financial year 2006-07, it is perceived that the conversion also happens in the financial year 2006-07. The hon'ble Madras High Court in the case of M. Nachiappan v. CIT 1996 (11) TMI 27 - MADRAS High Court had held that the condition which must be satisfied in order to attract the charge to tax under section 45 is a property converted must be a capital asset as on the date of conversion. In the instant case, during the financial year 2006-07 the asset was held as stock-in-trade. Only during the financial year 1994-95 the asset was a capital asset. Therefore, the market value and the cost inflation index applicable for the financial year 1994-95 should be applied together and not disparagingly like the one claimed by the assessee, in adopting the cost inflation index of year in which the asset was converted into stock-in-trade in computing long-term capital gains, the reasoning of the Assessing Officer appears to be correct and logical. In the circumstances, we are in agreement with the view of the Assessing Officer that the cost inflation index as stood in the year of conversion only has to be applied not the cost inflation index as stood in the year of taxation of capital gains of the asset - Decided against assessee. Set off of unabsorbed depreciation prior to the assessment year 1997-98 denied -Enhancement proposal of the Assessing Officer accepted by CIT(A) - Held that - This issue is squarely covered in favour of the assessee by the decision of the hon'ble Gujarat High Court in the case of General Motors India P. Ltd. v. Deputy CIT 2012 (8) TMI 714 - GUJARAT HIGH COURT wherein held that unabsorbed depreciation from 1997-98 up to assessment year 2001-02 got carried forward to the assessment year 2002-03 and became part thereof and was available for carry forward and set off against profits and gains of subsequent years without any limit whatsoever.any unabsorbed depreciation available to an assessee on the 1st day of April 2002 (assessment year 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by the Finance Act, 2001. And once the Circular No. 14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from the assessment year 1997-98 up to the assessment year 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by the Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever - Decided in favour of assessee.

Summary

Issues Involved:
1. Adoption of cost inflation index for computing capital gains.
2. Denial of set off of unabsorbed depreciation prior to the assessment year 1997-98.

Issue-wise Detailed Analysis:

1. Adoption of Cost Inflation Index for Computing Capital Gains:

The first issue pertains to whether the cost inflation index should be adopted from the year of conversion of property into stock-in-trade or the year of sale. The assessee converted its property into stock-in-trade in the financial year 1994-95 and sold it in the financial year 2006-07. The assessee computed capital gains using the cost inflation index of the year of sale, i.e., financial year 2006-07. However, the Assessing Officer adopted the cost inflation index of the year of conversion (1994-95). The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision.

The counsel for the assessee argued that as per section 45 of the Income-tax Act, chargeability to capital gains arises in the assessment year of sale, irrespective of the year of conversion into stock-in-trade. The assessee contended that section 48, which determines the indexed cost of acquisition, should be applied using the cost inflation index of the year of sale to account for inflation.

The Departmental representative supported the lower authorities' decision to use the cost inflation index of the year of conversion. The Tribunal, after hearing both sides, agreed with the Assessing Officer's reasoning. It concluded that the cost inflation index of the year of conversion should be applied, not the year of sale, as the asset was held as stock-in-trade in the financial year 2006-07. Thus, the ground raised by the assessee on this issue was rejected.

2. Denial of Set Off of Unabsorbed Depreciation Prior to the Assessment Year 1997-98:

The second issue involves the denial of set off of unabsorbed depreciation prior to the assessment year 1997-98 based on the decision of the Special Bench of the Mumbai Tribunal in the case of Deputy CIT v. Times Guaranty Ltd. The Commissioner of Income-tax (Appeals) directed the Assessing Officer to disallow unabsorbed depreciation prior to the assessment year 2002-03, following the Special Bench decision.

The counsel for the assessee argued that this issue is covered in favor of the assessee by the decision of the Gujarat High Court in General Motors India P. Ltd. v. Deputy CIT, which held that unabsorbed depreciation from 1997-98 up to assessment year 2001-02 is carried forward to the assessment year 2002-03 and is available for set off against profits and gains of subsequent years without any limit.

The Departmental representative supported the orders of the lower authorities. The Tribunal, upon reviewing the decisions and the Gujarat High Court's ruling, found that the issue is indeed covered in favor of the assessee. The Gujarat High Court had clarified that unabsorbed depreciation from the assessment years 1997-98 to 2001-02, carried forward to the assessment year 2002-03, should be governed by the amended provisions of section 32(2) of the Act, allowing it to be carried forward and set off without any time limit.

Respecting the Gujarat High Court's decision, the Tribunal allowed this ground of appeal of the assessee.

Conclusion:

The appeal of the assessee was partly allowed, with the Tribunal upholding the decision to use the cost inflation index of the year of conversion for computing capital gains but allowing the set off of unabsorbed depreciation from prior years based on the Gujarat High Court's ruling. The order was pronounced in the open court on February 19, 2014, at Chennai.